Further downgrades may lie ahead

A day after Standard & Poor's took the unprecedented step of downgrading the creditworthiness of the U.S. government to AA(PLUS) from AAA, the ratings agency offered a full-throated defence of its decision, calling the bitter standoff between President Barack Obama and Congress over raising the debt ceiling a “debacle” and warning that further downgrades may lie ahead.

In an unusual August 06 conference call with reporters, senior S&P officials insisted the ratings firm hadn't overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating.

“The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S&P's sovereign ratings committee. Another S&P official, David Beers, added that “fiscal policy, like other government policy, is fundamentally a political process.”

Administration officials at the White House and Treasury angrily criticised S&P's action as based on faulty budget accounting that discounted the just-enacted deal for increasing the debt limit.

The agreement set spending caps in the fiscal year that begins October 1 and calls for a bipartisan congressional “super committee” to propose more deficit reduction for up to $2.5 trillion in combined savings over a decade.

“The bipartisan compromise on deficit reduction was an important step in the right direction,” said White House press secretary Jay Carney in a statement on Saturday. “Yet, the path to getting there took too long and was at times too divisive. We must do better to make clear our nation's will, capacity and commitment to work together to tackle our major fiscal and economic challenges.”

In August 06 conference call, Mr. Chambers said the $2 trillion difference, in one scenario for 2021, equals only about 2 per cent of gross domestic product and doesn't alter the fundamental reality that the debt burden would continue to rise.

Speculative

Randy Neugebauer, Republican, who heads the House Financial Services' subcommittee on oversight and investigations, said while it was appropriate for S&P to consider the political situation in its analysis, it was speculative of it to use predictions of what Congress will likely do in the future as a rationale for a downgrade.